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| 22 October 2004 | Friday | 07 Ramazan 1425 |
Private sector credit rising too fast
KARACHI, Oct 21: Banks' lending to the private sector that stood at Rs21 billion in July-August this year shot up to Rs64.5 billion as on October 2, 2004, according to the latest data released by the State Bank.
Senior bankers say the private sector credit shot up in September on the back of cotton and wheat financing and also because of higher off-take of personal loans and auto leasing. They say another reason for Rs43.5 billion increase in the private sector credit within one month was that corporates were borrowing more anticipating that the interest rates were set to rise.
Their anticipation was rooted in ground realities including the fact that the State Bank has been raising interest rates quite consistently though in a measured fashion since July to contain rising inflation.
Bankers say that the private sector credit would rise much faster in October with the start of sugarcane crushing season and borrowing by rice exporters for financing local buying of the commodity. A senior official at National Bank said the private sector credit had risen also because of textile sector's borrowing for BMR projects. He said disbursement of the loans negotiated earlier starts after a time lag of up to six months. More often, the disbursement of the first instalment of a loan negotiated in March-April takes place in September-October. And this happens more in case of long term borrowing for expansion and BMR projects. "That partly explains why the credit off-take shot up in September," he said.
A senior official at another large local bank said private sector credit shot up last month due to very strong demand for personal loans and auto leasing. "Besides, the demand for farm loans was also high."
The share of farm loans in the overall private sector credit was Rs20.6 billion in July-September. But bankers say the amount does not include the farm loans disbursed by various banks in addition to the disbursements made under the State Bank's mandatory agricultural scheme. Large local banks like National Bank and Habib Bank make farm loans in addition to their agricultural lending under the scheme, taking advantage of their strong branch networks in the rural areas.
The Rs64.5 billion private sector credit disbursed between July 1-Octoebr 2, 2004 was more than double the Rs31.8 billion private sector lending by banks in the comparable period of last fiscal year.
Senior bankers say the current pace of the private sector credit off-take shows that full fiscal year lending to the private sector would cross Rs300 billion against an indicative target of Rs200 billion.
Under the credit plan for fiscal year July-June 2004-05, the private sector credit was projected at Rs200 billion, down from actual disbursement of Rs300 billion in the last fiscal year. But bankers say they are witnessing a very strong credit demand this year adding that at the end of this fiscal year in June 2005, private sector credit may shoot up to Rs300bn or even cross that mark.
Bankers and businessmen say the private sector would see a quantum jump despite depressed cotton prices due to an increase in the cost of imported raw materials and finished goods, thanks to a free fall of the rupee. The rupee has depreciated roughly by four per cent since July this year.
While forecasting a huge build-up in the private sector borrowing in the remaining period of this fiscal year, some bankers discount the possible impact on overall credit demand, of further hike in interest rates. "If the State Bank increases the rates more aggressively, as it should do to contain inflation, then we may not see a very big rise in the credit demand," said head of corporate division of a large local bank. "But still the private sector lending would be much higher than the initial target of Rs200 billion."
State Bank Governor Dr. Ishrat Husain recently warned the banks against reckless lending. He said "reckless lending or optimistic forecasting that current low interest rates environment would remain unchanged in time to come is bound to get your institutions into deep trouble."
Bankers view this warning as a clear indication that the State Bank may now raise the interest rates much faster than in the recent past. But they say they would continue lending generously until SBP actually raises interest rates to the levels where they can park more of their surplus funds in T-bills. Besides, if the SBP raises interest rates at a higher pace, it would lead banks to revise their own lending rates upwards and that will dampen the private sector credit demand.
Weighted average lending rate on fresh credit disbursement in August 2004 rose to 5.08 per cent from 4.63 per cent in response to a measured tightening of interest rates by the SBP. As the SBP continues raising interest rates, banks' average lending rate would show further increase from September onwards.
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